Green Asset Ratio: integrating sustainability into lending practices

Key takeaways

• EU banks will officially report their Green Asset Ratio (GAR) for the first time in 2024
• The GAR reflects the degree of sustainability in the asset portfolio of banks in accordance with the EU Taxonomy
• Banks are increasingly harmonising their lending with EU taxonomy criteria
• Sustainability has become an integral part of credit process

Introduction

Starting in 2024, banks in the EU will be required to report their Green Asset Ratio (GAR). The degree of sustainability of banking activities will be scrutinized more closely. This has its impact on banks’ lending to companies. It is increasingly not the credit profile of a firm, but its sustainability profile that is the key factor in attracting future financing.

In this article we will briefly reflect on the background of the GAR in relation to the EU Taxonomy. Thereafter will discuss the impact of the GAR on banks and on future lending to companies.

What is the GAR?

In brief, the GAR is a new measure for EU banks where the share of EU Taxonomy aligned assets on a balance sheet is compared to the total assets on the balance sheet.

EU Taxonomy prescribes firms be required to measure whether their activities are ecologically sustainable on a case-by-case basis. This measurement is accomplished through the technical criteria determined by the EU to reflect the ambitions of the Paris Climate Accords. All companies will be required to go through their revenues, capital investments and operational costs, and report whether their activities conform with EU Taxonomy and are thus “taxonomy eligible”, and if so, whether their activities are in line with the technical criteria for sustainability, “taxonomy aligned”. 

Financial institutions aggregate the available information to determine which elements of their credit portfolios are “taxonomy eligible”, and what part of that is “taxonomy aligned”. This is what will determine the GAR and reflects the degree of sustainability of a credit portfolio.

By reporting on a standard and uniform measure for around 150 banks within the EU, more emphasis will be put on the sustainability policy of a credit institution. The GAR will become an important topic of discussion between banks’ management, shareholders and other stakeholders.

Impact on Dutch banks

The GAR and other developments regarding sustainability already play an important role in the strategy of major Dutch banks.

ABN AMRO states in its 2022 annual report: “We aim to increase the asset volume of sustainable client loans (including mortgages and corporate loans) and ESG and impact investments as part of the bank’s outstanding mortgage loan book, corporate loan book and relevant client asset volume from around one-fifth to over one-third in 2024. We are making good progress, with a score of 31% at the year-end”.

Rabobank sets out the following in its 2022 annual report: “Rabobank is moving to a more strict definition for sustainable finance. In doing so, we aim to follow the evolving landscape of external standards. As alignment information becomes available, more technical screening criteria are drafted, and more counterparties become required to report under the Taxonomy, we gain more information and insights to steer our portfolio towards further Taxonomy alignment”.

Impact for companies 

The developments above will impact companies’ relationships with their banks. This result in more need for information by banks and also stricter lending policies based on the sustainability scores of firms.

Great(er) need for information regarding sustainability

We already noticed an increased demand for information from banks regarding sustainability in line with the EU Taxonomy.

Furthermore, clients are pushed in their efforts on sustainability and their path towards CO2 emission reduction. This does not just concern a sustainability strategy, but also the progress report on the meeting sustainability targets. Depending on their size, a number of firms already issue (integrated) sustainability reports¹ or make use of external sustainability ratings from, among others, EcoVadis and Sustainalytics.

In the broader context of climate risks banks are introducing sector specific surveys to assess potential climate risks in line with ECB guidelines.

Stricter screening selection

Sustainability is also increasingly leading to stricter screening. Some examples include:

• Banks move away from companies active in coal and fossil fuels. 
• In commercial real estate, a minimum energy label C is required as of 2023 to be eligible for (re)financing. Even though this rule is mandated by the government, in practice we see banks routinely demanding an energy label A already.
• We noticed that banks in certain sectors start with a sustainability screening test before they start with their credit assessment. The creditworthiness of the firm comes second in these case.

In short, sustainability is nowadays an integral part of the overall credit assessment. Sustainability is no longer a nice to have, but a need to have.

Do you have questions about sustainability in relation to your financing? Contact our experts in this field: Nicolai Knop and Dennis van Uden.

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1. Sustainability reporting is already mandatory for large listed companies in accordance with the NFRD. Next year the NFRD will be replaced by the CSRD. The scope of companies subject to sustainability reporting will be drastically increased in a number of steps from 2025. As of the 2025 financial year CSRD will apply to firms that meet at least two of the following criteria on their balance sheet dates: (i) greater than €20 million balance sheet total, (ii) greater than €40 million net turnover and (iii) greater than 250 employees. ↩︎